ST Engg JV to develop observation satellites

ST Engineering has set up a joint-venture company with Nanyang Technological University (NTU) and DSO National Laboratories to develop advanced earth observation satellites.

The new company, ST Electronics (Satellite Systems), will be a new and complementary addition to its existing satellite communications and sensor systems business, according to ST Engineering.

ST Engineering’s stake in the joint venture company is 51 per cent and will be held through ST Electronics’ wholly owned subsidiary, ST Electronics (Satcom & Sensor Systems). DSO and NTU will own 33 and 16 per cent stakes in the joint venture respectively.

When contacted by BT yesterday, representatives from ST Engineering responded that plans are in place for the funding of the research and engineering activities. However, the company declined to elaborate on the value of the investment.

‘As a leading global provider of satellite communication and sensor solutions, we see this new capability build-up in the earth observation satellite segment as a logical extension of our existing business,’ said ST Electronics president Lee Fook Sun.

The JV aims to couple the research and engineering competencies of both DSO and NTU with ST Electronics’ marketing expertise to design and develop local satellite technologies that can be sold in the global market.

The new company is not expected to have any material impact on the consolidated NTA per share and EPS of ST Engineering for the current financial year.

1QFY11 forms 20% of forecast; still undervalued

• Revenue increased by 15.2% to S$1.57bn, PATMI increased 19.7% to S$111mn

• Strong order book of S$11.3bn

• 1QFY11 forms 20% of FY forecast

• Kept forecasts unchanged

• Maintain Buy recommendation with target price of S$3.76

1QFY11 results discussion. Revenue for 1QFY11 was significantly higher than the same period last year primarily due to several milestone project completions and deliveries from various segments. Consequently, PATMI recorded a strong 19.7% surge to make up 20% of our full year forecast. The order book of the group is currently worth S$11.3bn (1.8X sales) and management guided that c.S$3bn would be realized over the rest of the year. STE’s order book typically accounts for c.60-70% of the year’s sales. Assuming these S$3bn of orders form 65% of sales for the rest of the year, full year revenue would be worth S$6.18bn (vs PSR est: S$6.23bn). Hence, we believe our forecasted sales for the year is

realistic and could have further upside if STE wins significant contracts hereon.

Risks. Further weakening of US$ & € against S$; Slow down in capacity added by commercial customers; Rise in interest rates could reduce attractiveness of STE’s dividend yield; Greater risk appetite by investors could reduce demand for low beta stocks.

Valuation. We used a blended valuation model of DCF (COE: 7.9%, terminal g: 3.5%) & P/E (20X FY11E EPS) to arrive at our target price of S$3.76. After incorporating dividend forecast of 14.8cents, we expect total returns of 26.8% to our target price. At the current market price, STE trades at merely 17X FY11E EPS as compared to its full cycle average of 19X P/E.

ST Engg’s Q1 profit jumps 20% to $111m

Revenue rises 15% to $1.57b; EPS up 19% to 3.65 cents

SINGAPORE Technologies Engineering (ST Engineering) yesterday posted a 20 per cent jump in first-quarter net profit to $111.1 million, from $92.8 million a year ago.

The net profit increase came on the back of a 15 per cent rise in the conglomerate’s revenue for the three months ended March 31.

Group revenue rose to $1.57 billion from $1.36 billion a year earlier, lifted by its electronics and land systems sectors, while its aerospace arm posted the strongest profit growth.

Earnings per share grew 19 per cent to 3.65 cents, while net asset value rose to 57.53 cents as at end-March, from 55.24 cents a year earlier.

For the first quarter, commercial sales came to $892 million, or 57 per cent of total turnover for the group, which derives significant revenues from supplying equipment to the Republic of Singapore Armed Forces and other military customers.

The land systems arm saw a 35 per cent jump in revenue to $358 million, thanks to higher project deliveries from its automotive business segment.

Double-digit revenue growth was also seen in the electronics arm, whose turnover rose 24 per cent to $444 million, thanks to milestone completions of the Circle Line and half-height platform screen door projects for the Land Transport Authority. Both sectors thus saw double-digit growth in Q1 net profit too.

While revenue for the aerospace arm was flat from a year ago, it still managed 33 per cent jump in pre-tax profit, thanks to a favourable sales mix and foreign exchange gains. As for the smallest of the four, the marine sector, revenue edged up 6 per cent on increased shiprepair activity but net profit dipped.

Overall, the group’s cash and cash equivalents and short-term investments totalled $1.85 billion, while advance payments from customers stood at $1.6 billion.

ST Engineering also secured new orders in the quarter, including aerospace maintenance and shipbuilding contracts, ending with an order book of $11.3 billion. Of this, it expects $3 billion to be delivered in the rest of 2011.

In the stock market yesterday, ST Engineering shares closed one cent higher at $3.08.

Minimal impact from LDA termination move

Termination notice for Ropax. ST Engineering (STE) announced that its marine arm – ST Marine (STM) – has received a notice of termination from Louis Dreyfus Armateurs (LDA) regarding the shipbuilding contract for the Roll-on/Roll-off Passenger ferry (Ropax); LDA is alleging that there is a delay in the delivery of the S$179m vessel. As a recap, LDA placed the order (worth S$168m then before add-ons) in Jul 2007, with construction to start in 1H08 and delivery in 1H10; the 4,000-dwt Ropax ferry measures about 161m long and 25.6m wide, and will operate in the English Channel for day and night crossing. LDA also alleges that there is a deficiency in the deadweight capacity.

No material impact on financials. In the event that the notice is valid, STM is required to refund the milestone payments made by LDA (amounting to S$129m plus interest); but STM maintains that under the contract, its total liability is capped at 10% of the contract price. In any case, STM has referred the matter to its legal advisers; STE also does not expect the contract termination to have any material impact on its NTA or EPS for FY11. In any case, we note that the milestone payments (excluding interest and damages) are just 2.2% of STE’s FY10 revenue, and we also understand that the group has been making provisions for this particular vessel since missing the stated delivery date.

Sell or lease vessel when completed. Meanwhile, we understand that the group is going ahead with the completion of this vessel; hence even if the contract is terminated, STE has the option of either reselling it in the secondary market or chartering it out to third party operators. However, as the Ropax may be highly customized, there is a slight risk that STE may need to refit the vessel or face a longer time before it can find a suitable buyer or charterer. But from recent transaction reports from shipbrokers, we understand that the demand for RoRo (Roll-on/Roll-off) vessels remains relatively buoyant.

Maintain BUY. Currently, it is still early days to assess if STE/STM has to pay damages etc, hence we hold off adjusting our FY11 estimates; our worst case scenario could see a <5% impact on FY11F pre-tax profit. We are still positive on the group’s overall prospects, defensive nature and do not believe that this incident will affect its strong payout (around 90% of core earnings) ability; hence we maintain our BUY rating and S$3.71 fair value (21x FY11F EPS).

ST Engg shares unhit by bid to end deal

LDA notice to end $179m contract referred to lawyers

THE market yesterday shrugged off news that Louis Dreyfus Armateurs (LDA) has given notice to terminate a $179 million contract with the marine arm of Singapore Technologies Engineering (ST Engg).

ST Engg shares hit an intra-day high of $3.14 before closing at $3.13, one cent up from Friday’s closing.

On Saturday, ST Engg announced that ST Marine had received a notice of termination from LDA dated March 17 relating to a shipping contract for a roll-on/roll-off passenger ferry (Ropax).

The Ropax contract – which was inked in July 2007 – was for a price of about $179 million (inclusive of variable options).

According to ST Engg, in the notice served by LDA, it was ‘alleged that there is a delay in the delivery of the Ropax vessel’.

‘They further allege that even if the vessel is tendered for delivery there will be deficiency in the deadweight capacity of the Ropax vessel,’ said ST Engg.

The notice states that LDA is ‘fully prepared to continue to fulfil its obligations under the contract’ in the event that it is not entitled to terminate the contract. However, it added that LDA ‘will become entitled in due course to terminate the contract by reason of deficiency in the deadweight capacity’.

If the notice is valid, ST Marine will be required to refund milestone payments amounting to $129 million plus interest. LDA may also pursue claims in damages.

ST Marine has referred the matter to its legal advisers, ST Engg said, adding: ‘If liable for damages, ST Marine’s position is that under the terms of the contract, its total liabilities for damages are capped at 10 per cent of the contract price.’

ST Engg said that ‘the termination of the contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year’.

RBS analyst Gina Kim said in a research report: ‘Although the company is saying that they expect no material impact on the earnings per share, we believe the negative impact on sentiment may be significant.’

The investment house said that the accumulated milestone plus damages claims can amount to $150 million – which is equivalent to 24 per cent of estimated pre-tax profits in 2011. A UBS estimate put a ‘high’ estimate of the potential charges at 5.5 per cent of estimated net profit for 2011.

However, RBS and UBS have maintained their ‘buy’ and ‘neutral’ ratings respectively. ‘We believe that ST Engg’s dividend payout of 90 per cent is secure despite this turn of events,’ said UBS analyst Cheryl Lee.

RBS added that ‘the relatively good news is that the contract termination value is worth only 1.3 per cent of orderbook and 1.6 per cent of market cap’.

When contacted by BT, ST Engg spokeswoman Sharolyn Choy said she was unable to comment on the lawsuit as it was being reviewed by ST Marine’s lawyers, but confirmed that the lawsuit was a first for ST Marine.